US Banks Braced for Further Bad News

Big US banks are nearing the end of another disappointing quarter for their trading businesses that has deepened fears over job losses on Wall Street.

The first two weeks of September failed to deliver a meaningful pick-up in trading activity on markets, hitting bank profits at a time when they are already under pressure from a sluggish economy. Trading desks remain the critical source of revenue at investment banks Goldman Sachs and Morgan Stanley, and can still make or break a quarter at big lenders such as JPMorgan Chase and Bank of America.

Analysts’ expectations have started to reflect the more difficult conditions. The average earnings estimate for Goldman and Morgan Stanley have each slipped 2 cents a share in the past month, according to data compiled by Bloomberg.

“The third quarter is shaping up to be another very slow period for client activity across most markets,” Richard Staite, an analyst with Atlantic Equities, wrote in a client note this month as he slashed his earnings estimates on Goldman and Morgan Stanley. “July and August were particularly weak and September is unlikely to make up for the shortfall.”

A surge in bond market volume, as measured by Finra’s Trace data, has not materialised. Daily trading on the New York Stock Exchange has slowed since late August.

In a presentation to investors this week, Jamie Dimon, JPMorgan chief executive, said trading “has been fairly stable for us”, and “not that dissimilar” to the second quarter, when the bank reported a drop in revenue from a year earlier.

Wall Street’s trading results this quarter may look meagre again when they are placed alongside last year’s third period, before doubts about the world’s economies and the effects of regulatory reforms began to sap confidence among hedge funds and other institutional investors.

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Senior bankers said the third-quarter showing, coming after poor trading results in the previous three months, underlined how the boom of a year ago was unlikely to be repeated. At the time, banks capitalised on pent-up investor demand following the crisis and higher prices due to less competition.

Although issuance of investment grade and high-yield debt had been robust during the quarter, the increase in new deals would not be enough to compensate for lacklustre trading activity, one banker said.

“It’s going to be another mediocre quarter because the secondary markets have been subdued,” he said. “It is just another sign that the boom of 2009 was an aberration.”

Meredith Whitney, a bank analyst, predicted recently that the securities industry might shed as many as 80,000 jobs globally in the next 18 months amid a prolonged revenue slump.

Some banks said they had talked to some analysts about trimming estimates but stressed it was not a wide-ranging effort to get Wall Street to slash its forecasts for the quarter.

Mr Staite predicted that Morgan Stanley’s fixed-income, currencies and commodities revenue would total $2.1 billion in the third quarter, down 10 percent from the period ending in June. He added equity trading would fall 15 percent to $1.2 billion.

Goldman’s fixed-income desks would produce $4.2 billion in revenue, a 4 percent drop from the second quarter, while its equity trading revenue would climb 32 percent to $1.6 billion, according to Mr Staite.

Big US banks are nearing the end of another disappointing quarter for their trading businesses that has deepened fears over job losses on Wall Street.

The first two weeks of September failed to deliver a meaningful pick-up in trading activity on markets, hitting bank profits at a time when they are already under pressure from a sluggish economy.

Trading desks remain the critical source of revenue at investment banks Goldman Sachs and Morgan Stanley, and can still make or break a quarter at big lenders such as JPMorgan Chase and Bank of America .

Analysts’ expectations have started to reflect the more difficult conditions. The average earnings estimate for Goldman and Morgan Stanley have each slipped 2 cents a share in the past month, according to data compiled by Bloomberg.

“The third quarter is shaping up to be another very slow period for client activity across most markets,” Richard Staite, an analyst with Atlantic Equities, wrote in a client note this month as he slashed his earnings estimates on Goldman and Morgan Stanley. “July and August were particularly weak and September is unlikely to make up for the shortfall.”

A surge in bond market volume, as measured by Finra’s Trace data, has not materialised. And daily trading on the New York Stock Exchange has slowed since late August.

In a presentation to investors this week, Jamie Dimon, JPMorgan chief executive, said trading “has been fairly stable for us”, and “not that dissimilar” to the second quarter, when the bank reported a drop in revenue from a year earlier.

Wall Street’s trading results this quarter may look meagre again when they are placed alongside last year’s third period, before doubts about the world’s economies and the effects of regulatory reforms began to sap confidence among hedge funds and other institutional investors.

Senior bankers said the third-quarter showing, coming after poor trading results in the previous three months, underlined how the boom of a year ago was unlikely to be repeated. At the time, banks capitalised on pent-up investor demand following the crisis and higher prices due to less competition.

"“The third quarter is shaping up to be another very slow period for client activity across most markets.”"-Atlantic Equities, Richard Staite

Although issuance of investment grade and high-yield debt had been robust during the quarter, the increase in new deals would not be enough to compensate for lacklustre trading activity, one banker said.

“It’s going to be another mediocre quarter because the secondary markets have been subdued,” he said. “It is just another sign that the boom of 2009 was an aberration.”

Meredith Whitney, a bank analyst, predicted recently that the securities industry might shed as many as 80,000 jobs globally in the next 18 months amid a prolonged revenue slump.

Some banks said they had talked to some analysts about trimming estimates but stressed it was not a wide-ranging effort to get Wall Street to slash its forecasts for the quarter.

Mr Staite predicted that Morgan Stanley’s fixed-income, currencies and commodities revenue would total $2.1 billion in the third quarter, down 10 percent from the period ending in June. He added equity trading would fall 15 percent to $1.2 billion.

Goldman’s fixed-income desks would produce $4.2 billion in revenue, a 4 percent drop from the second quarter, while its equity trading revenue would climb 32 percent to $1.6 billion, he said.